4 Reasons Mutual Funds Beat Individual Stocks

If you are investing in mutual funds, stocks may also be an investment that you consider. However, many investors prefer investing in mutual funds over investing in individual stocks. Here are a few ways that investing in mutual funds is better than investing in individual stocks.

1. Diversification

One of the biggest advantages that mutual funds have over individual stocks is that they are extremely diversified. An individual stock is tied directly to the performance of the company that issues it. Therefore, if sales are down, the price of the stock will tend to go down as well. Even the general perception of a company in the marketplace can have drastic effects on the price of a stock. When you deal with mutual funds, you will not have to worry about these problems. Mutual funds are made up of a very diversified portfolio of different securities. Therefore, the performance of an individual stock in the portfolio is not going to make much of a difference in the overall scheme of things. If you are investing in an individual company stock and the company goes bankrupt, you will lose your entire investment. However, with mutual funds, if a company in the portfolio goes bankrupt, it will not affect you that negatively.

2. Professional Management

Another big advantage that comes with investing in mutual funds is the professional management. At the top of a mutual fund is a team of experienced investors. These fund managers spend countless hours analyzing individual investments and strategies. They will take all of the funds that are provided by investors and use them to invest in the market. They will buy and sell securities at their discretion. Therefore, you do not have to worry about making any individual investment decisions. Many investors prefer this because it makes their job much easier. When you invest in individual stocks, you have to be very knowledgeable about the companies that you are investing in. This will require you to perform your own research, and you will ultimately be responsible for your results.

3. Volatility 

Many investors also prefer mutual funds because of their relatively low volatility. When you invest in individual stock, you could potentially have to deal with large price swings from time to time. This can work to your advantage sometimes and work against you at others. With mutual funds, you will typically get a steady upward growth curve. Although mutual fund performance can suffer, it will not be as drastic as with individual stocks.

4. Economies of Scale

When you invest in a mutual fund, you will be able to take advantage of economies of scale. You are pooling your resources together with those of other investors. The fund manager will then be able to buy securities in bulk. This can provide them with better deals and lower transaction costs. When you purchase individual stocks, you will not be able to buy them in bulk in most cases. Most individual investors do not have enough money to get any kind of a break.

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